In a large number of advanced countries, the current yields of governments bonds are hovering in negative territory or, at the very least, are at an insufficient level to preserve capital. Consequently, attention is increasingly shifting to dividends as a way of generating capital income; and they are becoming even more relevant as the issue of “reflation” comes to the fore with a gradual uptick in inflation rates.
As at the end of 2016, approximately 28 % of all government bonds of advanced economies in circulation sported negative yields, as shown by our AllianzGI QE Monitor. The situation is particularly dramatic in Japan and Europe. However, by the time investors factor in the effect of inflation it becomes clear that nominal yields in other parts of the fixed-income universe are not sufficient to preserve real purchasing power, either. Although current yields may well be positive in the United States, for example, real yields (nominal yields minus the inflation rate) are negative and even apply to maturities of up to ten years. If you save in this way, you are certain to lose purchasing power. An investment such as this is not appropriate for maintaining purchasing power and most definitely not suitable for accumulating capital. Thus, it is understandable that dividends are increasingly viewed as the new “interest on equities”, despite volatility being a fact of life with equity investments.
Dividend strategies certainly appear interesting amidst an environment of negative, or at least low, yields. Divergence between dividend yields and yields on government and corporate bonds has never been as large as it is today by historical standards, at least as far as European companies are concerned.
For investors, there are two key questions that are important to consider before any assertions can be made about the future success of dividend strategies:
1. What advantages can dividend strategies offer the long-term investor?
2. Taking the current market environment as a starting point, what can be expected in terms of the future performance of dividend yields?